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Real Estate Commission

Procuring Cause in Vermont

There seems to be a misunderstanding of what the standard is for "procuring cause" for a real estate agent to be entitled to a commission as a buyer's representative in Vermont. The Vermont Supreme Court has set the standard under Vermont law. Buyers (and sellers) should be aware of this standard when a real estate agent claims that they are owed a commission as the "procuring cause" of the sale. The legal standard is as follows:

1. It is not enough to simply show the property once or even twice to a buyer. The Vermont Supreme Court has said " [T]he assumption that the broker first interested [the purchaser] in buying the property is not enough to constitute him as the procuring cause of the sale. Although the brokers efforts need not be the sole cause of the sale, it is essential that they dominate the transaction and amount to something more than an incidental or contributing influence. If it were otherwise, every broker who has any concern with the property might earn separate commissions on a single sale. 123 Vt. at 154-155, 186 A.2d at 183. Thus, the agent must demonstrate that they were the dominate agent in the transaction and assisted the buyer in more than just seeing the property. The agent must show that they advised and assisted the buyer throughout the transaction until the purchase was complete.

2. Under Vermont law, to be entitled to a commission, "a broker must show that he procured a purchaser ready, willing, and able to purchase at the price and upon the terms prescribed by the seller." One example where the agent would not be considered the procuring cause under this standard is where the buyer is shown a property prior to selling their home. If the buyer cannot purchase the new property until they sell their existing home then the buyer is not currently "able" to purchase the property. The agent must continue working with the buyer until they are "able" to purchase to be considered the procuring cause. (See Ellis-Gould Corp. v. Kelly, 134 Vt. 255, 257, 356 A.2d 497, 498 (1976)). Thus, in this example the agent would have to be assisting in the purchase at the time that the buyer's house is sold.

3. Finally, the agent claiming to be procuring cause must also show there was continuity and no break in the chain of events. If the agent shows the property in January to a buyer but the buyer decides to hold off on a purchase until June, the agent who first showed the property would not be entitled to a commission as the procuring cause unless the agent continued working with the buyer in June when they decided to purchase the property. If the buyer hires another agent in between January and June, the new agent would be entitled to the commission as the procuring cause.

An agent claiming a commission as the "procuring cause" must be able to show that each of the factors above have been satisfied. If they cannot then, under Vermont law, the agent has not met the legal standard of "procuring cause" and is not entitled to a commission.

Hopefully this helps clarify some of the confusion.

If you still have questions about procuringcause, or any other real estate lingo, contact us.

Time for A Change

How is it that despite incredible advancements in the technology available to real estate agents and tremendous increases in agent productivity and efficiency is it possible that the commission charged by most firms has not changed in the last 30 years and is still 6% of the sales price? That defies every basic economic principle. I cannot think of another service industry where advancements in technology and productivity did not lead to lower prices.

One comparable example is stock brokerage firms. Firms used to charge hundreds of dollars to execute trades for their clients. Enter companies like E-Trade and Scott Trade who offered to execute trades for $15 or less. Now most brokerage firms do not even charge their clients to execute trades. Instead they focus their services on advice and wealth management.

In addition to being more efficient, studies have been done that demonstrate that real estate agents do not end up securing higher prices than homeowners that sell their own homes. In fact Steven D. Levitt and Stephen J. Dubner cite these studies in their book Super Freakonomics leading them to conclude that when analyzing which type of agent provides greater value a pimp or Realtor, "it seems clear that a pimp's services are considerably more valuable than a Realtor's."

The role of an agent has changed. Like changes in the stock brokerage industry, the role of an agent these days is to utilize their knowledge as well as the technology available to them to provide advice for their clients. Their role is not to be a market maker helping buyers and sellers find one another. The internet allows buyers and sellers to find one another. Instead, buyers and sellers need advice through the process once they find one another. That is the role of the agent and the fees charged should be commensurate with the services provided.

It is time for a change.

If you agree with us, then Flat Fee is the real estate company for you. Comment below and let us know what you think, or contact us here.

The Inherent Conflict of Buyer Agent Pay

Most agents that represent buyers require the buyers to pay them a percentage of the purchase price as their fee for assisting in the purchase of a new home. There is an inherent conflict in this model.

A buyer agent has a fiduciary obligation to act in the best interest of their client. However, because the buyer agent requires their client to pay them a percentage of the sales price, the agent's interest is actually in conflict with the buyer's interest.

The buyer's interest is to pay as little as possible for the home. In contrast, the agent's interest is to get paid as much as possible for each transaction. Because the agent gets paid more if the buyer pays more, there is a divergence in the interest of the client and agent.

Arguably this inherent conflict is itself a breach of the fiduciary obligation an agent owes to its buyer clients. We recommend that buyers fully discuss this potential conflict with their agent before signing any agreement.

At Flat Fee, we do things differently. We charge lower fees and will set you up with exactly what you need. Don't want a full service agent? At Flat Fee, you don't have to pay for one. To learn more about what makes Flat Fee different from other real estateagencies, check out our website.

If you want real estate done different, go with Flat Fee. Contact us here.

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                                        Don't Be Bought

                                        Because of the emotional aspects of homeownership, it is natural when selling a home to believe that your house is better than any other comparable property on the market and as a result is worth more than any other comparable property.

                                        Real estate agents are very cognizant of these feelings and some unscrupulous agents will prey upon these emotions to help secure your business.

                                        Some real estate agents will intentionally provide a homeowner with an unrealistic valuation of their home when trying to secure their listing. The theory is that if the agent can secure the initial listing that they can later convince the seller to reduce the listing price to a more realistic one.

                                        It is normally easy to convince sellers to reduce the price after the initial inflated listing price because the seller sees little activity at the unrealistic price. The agent will say something like, "in a good market your home would have sold quickly at this price, but because we are in a challenging market I think you need to reduce the price to help stimulate activity."

                                        The practice described above is known as "buying a listing" and it is unethical. Please "Don't Be Bought". Thank you.

                                        If you want a real estate company you can trust, contact Flat Fee.

                                        The Zillow Effect

                                        While the internet has made the process of buying and selling homes much more efficient, there have been a few drawbacks associated with the ability of buyers and sellers to easily access volumes of property information online.

                                        One notable drawback has been what I refer to as the "Zillow Effect".

                                        Zillow is a popular website that allows buyers and sellers to look up listings of homes and then determine an estimate of the home's value. Zillow, like other desktop appraisal software, bases its values on recent sales from databases of public information.

                                        Zillow is very good at giving broad general estimates of value. However, Zillow does a poor job of providing a detailed analysis of value based upon a particular home.

                                        Zillow does not have the ability to judge the interior quality of a home. It also has no way of knowing whether the home has large items of deferred maintenance or needs immediate repairs. As such, Zillow's estimate of value can be off by more than 10% in many cases.

                                        The problem with sites like Zillow is that sellers have started relying upon the values provided as the absolute accurate fair market value for their home. In many cases, the estimate provided by Zillow creates unrealistic expectations for sellers. This unrealistic expectation of value and sales price is the "Zillow Effect".

                                        Sellers need to understand that Zillow is a great tool for getting a general sense of the market but a poor tool for determining exact value for a home. Zillow is simply processing readily available public data of sales. It does not process the quality of individual homes. As a result, sellers need to take Zillow's estimates with a grain of salt and need to understand the other market factors that drive prices.

                                        At Flat Fee we do things different. We send real people to our properties and use our real estate expert's opinions toappraiseproperties. If you're tired of automated everything, try a company that is, too. Contact us or visit our website to learn more about Flat Fee and how we do business.

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                                          Great little article, but it also goes both ways. So much of a house or property are the intangables. For example if you border govt. land, a huge private estate, or a park where no one can build and it provides shelter and other things for you, if your house is well situated in regards to other neighboring houses, the view, valley or hill, weather patterns, etc One thing that is obvious is home structure. Build it like a football team, with a strong offensive line ie foundation. If you have that and of course a sick location, forget the NYSE, RE is the way to go IMHO. Good luck.
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                                            The Commission Model's Role in Our Financial Crisis

                                            It has been well documented that our current financial problems and recent financial crisis were the result of the bursting of the housing bubble. Investment banks and others sold bundled mortgaged backed securities and insurance against defaults on the those securities based upon the premise that housing prices would always appreciate. Even Ben Bernake when pressed on the downside risk of the derivatives market said, prior to the financial meltdown, that it was unlikely that housing prices would decline in any serious or prolonged way and thus the risks of the housing bubble bursting were minor.

                                            Books such as the "Big Short" and movies such as the "Inside Job" have done a wonderful job documenting how Wall Street investment banks and regulators were to blame for our current financial problems and recent financial meltdown.

                                            Additionally, we all have heard stories of mortgage brokers who unscrupulously encouraged homebuyers to borrow more money than they could afford. We also have heard stories of how appraisers worked in cahoots with mortgage lenders to ensure that high risk borrowers were able to obtain financing based simply upon the equity of the house. For some reason, however, we have heard very little about real estate agents that encouraged homebuyers to buy more expensive homes than they could afford.

                                            A large majority of real estate agents are paid a commission based upon the price of the home their client purchases. If their client purchases a higher priced home they get paid more.

                                            There is an inherent conflict of interest in this model. The agent's fiduciary obligation is to look out for the best interests of the buyer. In almost every case, it will be in the best interest of the buyer to pay less for a home. In contrast, it is in the best interest of their agent for the buyer to pay more for the home.

                                            With this inherent conflict of interest as the backdrop, buyer agents were out in force encouraging homebuyers to purchase expensive homes during the housing bubble. They, like Ben Bernake, never pointed out the downside risk to their clients. They never warned their clients that if the bubble were to burst, they could suffer financial harm.

                                            Had the majority of real estate agents not been paid based upon the price of the home and rather by some other measure, then it is possible that some of the damage could have been avoided. At the very least, real estate agents and the real estate brokerage industry may have been heeding warnings to the public rather than engaging in the same reckless behavior as the investment banks and others that created our current financial mess.

                                            This is the sort of revolutionary thinking that happens at Flat Fee. By working on a non-commission based systemyou can be assured we will give you the best quality real estate work for a pre-discussed amount. If you have more questions about how Flat Fee works, or our business model, contact us here.

                                            "My Way or The Highway"

                                            It always amazes me when someone says to me, "well, that is not the way we do it here." The implication, of course, is that their way is correct and my way is incorrect.

                                            While I can respect a person who believes their method is the correct way, people who say, "well, that is not the way we do it here" typically do not respect any other point of view or methodology for doing something.They are basically saying, "it is my way or the highway."

                                            If people never challenged conventional thinking or methodologies then there would never be any progress.It is important to always look to see if there are more efficient or effective methods for doing something.That is how progress occurs.

                                            The real estate industry, more than most, seems to be filled with individuals who take the "my way or the highway approach.As a result, the industry seems to cater less to what the public wants and more to what they think is best.

                                            If the "my way or the highway folks put aside their ego for a moment and listened to the public they would hear that some of the conventional thinking is outdated and that the public wants better methodologies implemented.Here are some examples:

                                            1. Compensation - The public is tired of the 6% conventional compensation model. They think that real estate agents are overcompensated for the services provided. They believe that advances in technology should have led to a reduction in the conventional rate.The public wants the industry to develop a more equitable compensation model that rewards the services provided based upon the time spent by the agent providing advice, not based upon the ultimate sales price of the home.

                                            2. Scheduling Appointments - Sellers do not want to receive calls from other real estate agents regarding scheduling showings of their homes. Sellers believe that one of the duties of their agent is to be an intermediary for them and to coordinate the scheduling of all showings.They believe agents who do not provide scheduling coordination are lazy.Despite this perception, firms continue utilizing this methodology.

                                            3. Assisted Showings - Buyers that hire their own agent for buyer representation do not want seller agents present during a showing.When you speak to buyers after a showing where the seller's agent was present, an overwhelming majority say that the seller's agent made them feel uncomfortable.In thebuyers opinion, they hired their own agent so that they did not have to deal with the seller's agent. Again, the public believes that one of the roles of an agent is to be a true intermediary alleviating the need for them to work directly with the seller or the seller's agent.

                                            4. Electronic Lockboxes - The public wants agents to utilize the most recent technology to ensure that access to their home is monitored to the best of the agent's ability.Many agents currently utilize electronic lockboxes which can only be opened by digitally encrypted keys.The keys and boxes create a permanent digital record so that the owner knows who accessed their home and when.Despite this technology being available, many agents in Vermont do not utilize it. In fact, because so many showings are done after regular business hours, many agents will leave the keys in an envelope at their office dropbox or at the property itself without ever seeing who is taking the keys.

                                            5. Closing Coordinators - The public expects that if they are purchasing a property, their agent will be the primary contact throughout and that one of the duties of their agent will be to coordinate the closing.Instead of listening to the public, most firms have a "closing coordinator."These coordinators are typically salaried employees.In some cases they are paid per closing.In either event, if the firm did not utilize a third party closing coordinator then presumably they could charge the client less.Thus, not only does the public not want to have to communicate with a third party, but the methodology is inefficient from an economic standpoint as well.

                                            6. Print Ads of Listings - The public does not want to see print ads of listings anymore. In our environmentally conscious society and given the fact that all buyers are looking online these days, the public views print ads of listings as a waste of paper and resources. The public would much prefer that firms utilize the internet and spend resources there rather than waste paper.

                                            7. Pictures on Business Cards - Only would an industry run by "my way or the highway folks still believe that a picture on a business card is a good idea.I cannot think of any other industry where people still include a picture of themselves on their card.I don't think any business card designer today would suggest putting a picture on your card primarily because the public does not want to see pictures on business cards.

                                            8. Luxury Cars and Vanity Plates - More than any other industry, in real estate there is a perceived need to drive the most expensive car possible.In many cases, agents cannot afford to drive a luxury car but do so anyway.The theory is that the public will equate an agent's track record for successful transactions with the type of car being driven.There also seems to be a theory that a vanity plate on the luxury car adds to that perception.In this day and age, the public does not want their agent to drive a car they cannot afford.The public wants agents to be themselves and drive the car that is right for them.The public is very good at picking up on facades and when they do the person putting up the facade loses credibility.

                                            9.Buying Listings - There is a practice in the real estate industry known as "buying listings."This is the practice where an agent will tell a seller that their home is worth more than it is simply to secure the listing.The agent will overprice the home initially to get the listing and then when it does not sell, the agent convinces the seller to reduce the price.While this practice is unethical, it happens more than anyone likes to admit.The problem with the practice is that it not only does a disservice to the particular seller, it does a disservice to the public.It hampers the ability of the public to get a sense of the true market value of properties.

                                            10.Commission Outside the Transaction - The real estate industry is peculiar in many ways, but one in particular is that its participants view their compensation as somehow distinct and separate from the transaction in which they participate.For instance, say that a buyer offers a seller $196,000 for their home. And let's say the seller won't sell for less than $198,000.Assume for a moment the seller's agent is the only agent involved in the transaction and stands to make a 6% commission should the parties come to an agreement and the sale occurs.Instead of reducing their commission from $11,760 to $9,760, the agent will risk losing the sale by telling the buyer they need to increase their offer to $198,000.If the buyer refuses, the agent will let the deal die rather than giving up $2,000.From the public's perspective the commission is integral to the transaction.It is the largest transactional fee to either side and it has the potential to bring deals together.

                                            At Flat Fee, we do things differently. We work with you to meet your real estate needs. We want what's best for you. We're here to change the way people think of real estate. If you're ready for a forward thinking real estate company, contact us.

                                            Why Do Agents Double Dip?

                                            While many of you may think that this article refers to the classic Seinfeld episode where George Costanza dips a chip, bites it and dips again, it is not. It is however about something equally ridiculous: real estate agents double charging their clients.

                                            The typical commission in a real estate transaction in Vermont is 6% of the sales price (I think it is well documented in this blog and on our website www.flatfeevt.com that this amount is excessive so I will refrain from commenting on that aspect in this blog). Typically the listing agent will split the commission equally between themselves and the buyer's agent. Thus, in a typical transaction the seller pays a 3% commission to their agent and a 3% commission to the buyer's agent.

                                            The ridiculousness comes when the buyer is unrepresented. Instead of doing the decent thing and reducing the overall commission to 3%, the seller's agent will insist upon keeping both their 3% commission as well as the buyer's 3% commission. Thus, the agent gets paid twice for a total commission of 6%.

                                            How can these agents possibly justify this "double dip"?

                                            Some agents will attempt to justify this "double dip" by suggesting that the transaction will require twice as much time. This is absurd. The transaction may require a couple of extra minutes or possibly an hour, but certainly nowhere near double the amount of time. The amount of work certainly does not justify insisting upon a double payment.

                                            At Flat Fee Real Estate we learned from Seinfeld and do not double dip. We believe other firms should follow. To learn more about how Flat Fee works, click here. Still have questions? Contact us any time of day.

                                            The Pyramid Approach

                                            A pyramid scheme is a business model that involves promising participants payment for enrolling other people into the scheme rather than really supplying any real value to the public. The business model is unsustainable and eventually collapses when the public realizes that they are not receiving any real value for the amount of money being paid. Pyramid schemes are a form of fraud.

                                            While real estate agents do provide a service to the public, the business model employed by every larger real estate brokerage firm is akin to a pyramid scheme. Even though a service is provided, the scheme is built upon the overcharging for those services. Instead of charging the public a fair price, larger firms charge the public 5-6% of the sales price as a commission. Thus, there is no "real value" provided to the public and the overcharging of the public establishes the foundation of the scheme.

                                            The next element of the pyramid scheme is to enroll participants into the scheme with promises of lucrative payments. Larger firms recruit as many people as they can as quickly as they can. In most cases, these firms will hire anybody that holds a license to sell real estate. These firms do not care about background, experience or qualifications. Their primary concern is to get bodies to help spread the scheme to a wider array of the public.

                                            Like most pyramid schemes those at the top of the pyramid show their recruits just how successful they have been in selling the scheme to the public. They convince these recruits that they can be equally successful by first joining the scheme and then recruiting other agents to help grow the scheme.

                                            The next element of the scheme is for the participants to convince the public that they will receive real value by hiring their firm. They often use their size, which is the very essence of the success of the scheme, as a selling point for their services. Larger firms will, without support, tell people that their size will help get their property sold faster or that they will be able to secure a better deal for their buyers.

                                            The participants in the scheme will prey upon their social networks, friends and family to help perpetuate the scheme. They will use the trust established through their relationships to convince their social network, friends and family that they are receiving real value for the 5-6% commission. All the while these participants know that the services can be provided for less and in fact are provided for less by other firms.

                                            Like every pyramid scheme the large firm real estate brokerage model is unsustainable and will eventually collapse. As the public becomes more knowledgeable about the true value of the services provided, the public will begin to question the participants in the scheme. As more and more people lose confidence in the participants in the scheme and less and less fall victim to the scheme, the dollars necessary to perpetuate the scheme will disappear. As with any other pyramid scheme, once the dollars dry up the pyramid will topple.

                                            It is amazing that the pyramid has lasted as long as it has.

                                            At Flat Fee, we don't believe in the Pyramid approach. We work with an honest business model to provide the best real estate services for both buyers and sellers. To learn more about Flat Fee, or to contact us, click here.

                                            How Realistic Is It To Negotiate Commissions

                                            You would think that in these challenging economic times that all businesses would be willing to enter into negotiations for the price of goods and services. However, the real estate industry continues to resist attempts by consumers to negotiate their price for services.

                                            Most real estate agents will not even entertain a conversation of negotiating their commission. Most agents will say that their non-negotiable price is 6% of the sales price.

                                            In some instances agents may be willing to reduce their commission to 5% of the sales price if they think it means they will secure the listing away from another agent. However, attempts at negotiating lower than 5% will usually fall upon deaf ears.

                                            Why are agents not willing to negotiate their commission? For instance, if your home is $1,000,000, why do they insist upon the same 6% as they would if your home were worth $100,000. They could reduce their commission to 3% for the $1,000,000 home and still make $24,000 more than they would selling the $100,000 home.

                                            The only logical explanation is that the industry continues to manipulate pricing to ensure that the consumer has limited choices. Some might call this a classic example of a monopoly and a restraint on free trade.

                                            However, thanks to business models such as ours, the consumer now has a choice and can exert influence over pricing in the real estate industry. Market competition is good for consumers and at Flat Fee we believe that the consumer should dictate pricing, not the other way around.

                                            Interested in Flat Fee and our sustainable business model? Contact us.

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